Smoother Sailing Ahead

Before there was COVID-19, before the toilet paper sold out, before lumber prices went to the moon, before assembly lines were shut down for lack of computer chips, the health of the collective supply chain in the U.S. and globally was … tenuous.

The virus merely broke the weakest links. A few others were snapped as a combination of seemingly unrelated conditions: shortages in raw materials, hoarding by companies trying to work around supply shortages, backlogs of container ships accumulating off U.S. ports, manufacturing delays from the world’s biggest exporter during China’s failed effort to wait out the pandemic by idling factories, labor shortages in transportation and delivery channels nationwide. And, of course, the brutal conflagration in Ukraine that has limited exports from both the Russian invaders and the Ukrainians. 

Some of those conditions, but not all, have eased. The semiconductor shortage that pushed lead times in the auto industry from a few months to nearly a year—and cost the industry an estimated $210 billion in sales in 2021 alone—hasn’t gone away completely, but production is trending back up. Ports off of southern California have cleared the backlog on incoming cargo containers.

Logistics industry executives who described 2020 and 2021 as a mess now concede that the mess is still out there—it’s just a different kind of mess. There remains, they say, a common question coming from corporate offices: “Where’s my stuff?”

It’s hard to find silver linings in dark economic clouds, but the surge in interest rates in the U.S., the Fed’s effort to strangle an inflation monster, has dampened consumer spending that went hog-wild in 2020. 

Here’s one example of what’s happening on the retail front. Home Depot saw its stock price fall by a third in the early weeks of the pandemic. Then people stuck in their homes started pouring into stores to spruce up their homes or address long-deferred projects. Result? Record sales and stock that went from $152 at the nadir to $415 a share by the end of 2021.

Since then, with the federal infusion tapering off, sales have, too, and the current share price of $293 reflects a nearly 30 percent pullback. With consumers scaling back demand, supply chains have found some breathing room—some—to reload. But again, that depends on the sector. 

In Kansas City, which found its logistics legs over the past decade and has become one of the nation’s hottest markets for industrial real estate, things are cooling a bit. WarehouseQuote, a NorthPoint Development subsidiary that connects manufacturers and shippers with short-term warehouse space, expects that the worst of the demand has peaked, says WarehouseQuote’s marketing director Jordan Brunk. 

“Though we’ve seen year-over-year price increases, we are seeing some softening in the market and anticipate potential pricing reductions (based on increased space availability) around mid-year, through the end of 2023,” Brunk said. “Many of our customers who imported record amounts of cargo in 2022 due to supply chain bottlenecks are now off-loading the inventory, which is leading to easing around the industry.”

Shipping rates—for overland trucking, rail, ocean shipping, and other modes—have, in turn, tumbled amid a literal sea change in consumer behaviors. During the pandemic, they crushed sellers with demand for new furniture and décor, new outdoor living and recreational spaces, and big-screen televisions. Their tastes, and whatever discretionary income they still have, have been redirected to all things experiential—mainly travel, entertainment, and the full-throated return to bars and restaurants.

A Shared Pain

A study last year by supply-chain consultancy Avnet Silica, drawn from transcripts of more than 30,000 earnings calls with corporate executives, showed that of the 20 sectors where supply-chain concerns were predominant, more than half involved manufacturing that required semiconductors and electrical components, one-fourth originated with groceries and agribusiness.

Inflation was soaring as a worrisome business consideration for those companies, but for the first time in years, across 12 sectors, every executive cited supply chain as reason for concern. COVID-19, by contrast, remained on the radar of only 9 percent of respondents.

Still reeling from the impact of the pandemic, global supply chains took another shot to the body with Russia’s military invasion of Ukraine in February 2022. 

The agriculture sector went nuclear with the onset of war between two of the world’s five biggest wheat exporters—Russia at No. 1, and Ukraine at No. 5. Almost overnight, futures prices soared, peaking at $12.77 by May 17. Since, then, other nations have filled the expected production gap—more than filled it, actually, sending prices into a free fall that took futures below $6 on May 2 of this year. Similarly, Ukraine was No. 4 in corn exports, and Russia No. 7 in 2021, and the conflict sent prices past $8.16 a bushel in late April 2022; by this May, corn had fallen to $6.30.

Manufacturing and construction are worlds away from ag production, but similar trends have played out. On the construction side, the great lumber spike of early 2021 saw prices go stratospheric to an all-time high of $1,481.50 per 1,000 board feet on May 4. Two years later, they stood at $341, barely higher than their pre-pandemic levels.

Copper, which plunged below $2.20 a pound amid fear of a global depression early in the pandemic, more than doubled to $4.47 over the next two years, fell back, then regained ground at slightly over $4 early in May.

None of which is to say that construction has moderated its post-pandemic surge. Surveying by the Associated Builders and Contractors showed construction material costs rose 1.3 percent in January 2023 alone, reversing a recent pullback. That left prices 4.9 percent higher year-over-year, and while that was the smallest annual increase since January 2021, construction materials remain significantly pricier than before the pandemic—by a whopping 37.7 percent.

All things considered, says Brunk, there are reasons to feel positive about where supply chains and delivery systems are headed. 

“There is still some over-ordering, and bottlenecks that force companies to over-hoard, then they have to pay to store it all. That’s not good for anybody, and the customer picks up the tab,” he said. “Companies themselves created a bit of the issue, from a bottleneck perspective, because some really got burned by not having enough materials on hand in 2020 and ’21. That’s human nature,” he said. 

“Now, we see the pendulum swing the other way. We saw a ton of pre-imported orders before the peak in 2022, and that created nearly zero vacancies across most markets in the U.S. It’s not taking six months to get ocean containers in, pricing is more in line with 2018, and that makes things work a lot smoother.”